Insurance Law: Ethics And Multiple Insureds

Multiple Insureds

Where multiple insureds are entitled to a defense under the same policy for the same claim, the insurer often assigns the same defense counsel to defend the insureds, creating potential conflicts.  For example, a passenger in a car may sue both the driver and the owner of the car after a wreck.  An owner and a driver are typically entitled to a defense under the same policy.  However, the driver and the owner may have conflicting interests if, for example, the owner asserts that the driver was operating the car without permission.

If hired to represent multiple insureds under the same policy, defense counsel should, at the inception of the representation

• analyze the potential conflicts among the insureds
• disclose these potential conflicts in writing to each insured and the insurer

obtain valid conflict waivers from all parties.Even after these initial disclosures, defense counsel should continue to monitor potential conflicts,   as they may ultimately require defense counsel to withdraw.

 Coverage Defenses

Georgia Rule of Professional Conduct 1.6(a) states:

A lawyer shall maintain in confidence all information gained in the professional relationship with a client, including information which the client has requested to be held inviolate or the disclosure of which would be embarrassing or would likely be detrimental to the client, unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, or are required by these rules or other law, or by order of the Court.

In the course of a representation of an insured, defense counsel may learn of information supporting a coverage defense.  Regardless of whether the attorney learns of the information through independent investigation and activities, or whether the insured informs the attorney of the information, defense counsel is generally barred from disclosing the information to the insurer.

Parsons v. Continental National American Group

A famous case illustrating this conflict is Parsons v. Continental National American Group. The Parsons were violently assaulted by Michael Smithey, the 14-year-old son of CNA’s insureds.  CNA appointed counsel to defend the Smitheys in the resulting lawsuit.  During the lawsuit, the attorney informed CNA of a confidential file on Michael Smithey from a psychiatric institution that treated him.  Counsel reported that the confidential file showed that the boy knew what he was doing was wrong. Counsel further reported to the insurer that “the assault [Michael] committed on claimants can only be a deliberate act on his part.”  After receiving this letter, CNA sent a reservation of rights to the Smitheys warning that Michael’s act might have been an intentional act excluded from coverage.  In preparation for trial, defense counsel interviewed Michael and wrote to CNA: “[Michael’s] own story makes it obvious that his acts were willful and criminal.”  At trial, the court granted the Parson’s motion for a directed verdict on the issue of Michael’s liability, and a judgment was entered against him for $50,000.

The Parsons then garnished the CNA policy and offered to settle for the limits of $25,000.  CNA rejected the offer.  Instead, CNA defended the garnishment action by claiming that the intentional acts exclusion applied.  The same law firm and attorney that had represented Michael represented CNA in the garnishment action.  The Parsons contended that CNA was estopped to deny coverage and had waived the intentional acts exclusion because the company exploited the relationship between its appointed defense counsel and the Smithey’s son.  The Arizona Supreme Court agreed.  After noting that defense counsel obtained confidential and privileged information by virtue of the attorney-client relationship:

[W]e hold that such conduct constitutes a waiver of any policy defense, and is so contrary to public policy that the insurance company is estopped as a matter of law from disclaiming liability under any exclusionary clause in the policy.
Accordingly, CNA was liable for the entire $50,000 judgment.

Three years before Parsons, the Texas Supreme Court held that an insurer was estopped from denying coverage due to the insured’s late notice where the defense counsel hired by the insurance company to represent the insured “actively work[ed] against [the insured] in developing evidence for [the insurer] on the coverage question.”  The Texas Supreme Court stated that “[a]n attorney employed by an insurer to represent the insured simply cannot take up the cudgels of the insurer against the insured…”.  An attorney’s actions against his client in this manner violates the rules of professional conduct.  An attorney should not act as both defense counsel for the insured and coverage counsel for the insurer.

Insurance Law: Eroding Limits and Exhaustion of Limits

Eroding Limits and Exhaustion of Limits

Although policy limits generally constitute the boundaries of the insurer’s indemnity obligations, most liability policies do not limit the amount an insurer must pay in defense of claims.  One way an insurer may limit defense costs and its overall exposure is through the use of “eroding” or “burning limits” policies. In these policies, defense costs erode indemnity limits.  In other words, every dollar spent on defense reduces by one dollar the amount available to settle or otherwise resolve the claim. Increasing numbers of professional liability policies and employment practices liability policies include eroding limits.  Although the idea is gaining popularity among automobile, homeowners’ and commercial general liability policies, competitive markets in some industries and state regulations are likely to curtail expansive use of eroding coverage.

A similar situation arises when there are several claims, and the payment of one or more exhausts policy limits.  Whether an insurer has a duty to continue to defend its insured after policy limits have been exhausted is a contractual matter spelled out in the policy. Depending on the policy and the use of the limits, an insurer’s duty to defend some claims may be satisfied by defending and accomplishing a good-faith settlement of other claims in a manner that provides a real benefit to the insured.

In either situation, defense counsel must advise the insured of the benefits of a suggested litigation activity (for example, hiring an expensive expert) and its potential effect on both the defense of the case and the available indemnity limits. In doing so, however, the defense attorney must be careful not to give coverage advice.  In his or her initial letter to the insured regarding undertaking the defense assignment, the defense attorney should specifically state that he or she will not be rendering any coverage advice.

Good Practice For An Attorney Handling A Defense

It is good practice for an attorney handling a defense pursuant to a declining limits policy is for the attorney to create a liability analysis report and a litigation budget as soon as possible.  These tools should be updated regularly, with copies sent to the insurer and the insured.  An attorney who determines that potential defense costs may impair the insurer’s ability to indemnify the insured for exposure should bring that issue to both the insurer and the insured’s attention as early as possible.

In dealing with plaintiff’s counsel, the best course of action is to be candid about the fact that the policy limits may be reduced by defense costs.  In a 2003 case in California, the Court of Appeal found that an insured’s judgment creditor could sue the attorney who had been retained by the insurer to provide a coverage analysis when that attorney misrepresented the scope of coverage available for the claim.

When policy limits are exhausted, insurers generally advise their insured and defense counsel that the insurer will no longer be funding the defense.  However, an insurer’s decision to cease payment does not end the defense attorney’s duty to the client.  Counsel must follow the prescribed rules for withdrawing from cases. It is not clear whether exhaustion of policy limits in and of itself allows a defense attorney to seek an order of withdrawal.  A court may hold that an attorney who undertakes the defense of an insured under a burning limits policy does so at his own peril and with knowledge that there is a maximum amount available for defense costs. Some courts have refused to allow an attorney to withdraw from representation when the insurer ceased to pay for the defense.
Ethical issues arise for the plaintiff’s attorney as well.  A plaintiff’s attorney, in gathering policy information at the outset of litigation, should attempt to determine whether the policy is an eroding limits policy.  Obviously, in a declining limits policy, amounts spent on aggressive litigation decrease the plaintiff’s potential recovery. As part of initial litigation strategy, a plaintiff’s attorney should weigh the pros and cons of conducting certain activities (such as extensive discovery) and consider how those activities may bear on the ultimate recovery.  The plaintiff’s attorney should also disclose these issues to the client and explain how certain litigation tactics may impact recovery.

Insurance Law: Issues And The Tripartite Relationship

Providing a defense when the insurer reserves its rights

The most common problem that arises in the “tripartite relationship” occurs when the carrier undertakes the defense of the insured pursuant to a reservation of rights.  In such cases, it is possible for an insurer to take less interest in paying for a vigorous defense, because the insurer may ultimately prevail on the coverage issue and withdraw its defense.  Additionally, if defense counsel is aware of the coverage issues, defense counsel may gather discovery or steer the case toward a coverage result that is favorable to the insurer (for example, by eliciting deposition testimony that supports a particular coverage defense). In these cases, conflicts can generally be avoided where:

• appointed defense counsel withdraws
• the insured is allowed to select independent counsel

When defending under a reservation of rights, the insurer should not hire attorneys who provided the coverage opinion as defense counsel for the insured.  Instead, independent defense counsel with no involvement in the coverage issue should be appointed to avoid the conflict.

Damages Exceed Coverage Available Under the Policy

In a case where an insured has a solid liability defense but the claimed damages exceed policy limits, conflicts arise for defense counsel.  An insurer may want to aggressively litigate a case in hopes of receiving a defense verdict or a judgment below policy limits.  Such a course of action puts at risk the insured’s personal assets, because a plaintiff’s verdict may result in a judgment in excess of policy limits.  The defense attorney may find herself in a conflicting situation, where settling is in the best interest of the insured client, but the insurer may think twice about continuing a business relationship with a defense attorney who is unwilling to try hard cases.3  In addition, defense counsel may be personally liable for failing to settle within the policy limits. This conundrum can create the need to hire separate, independent defense counsel to represent the interests of the insured.  Similar conflicts may arise where the insured has a self-insured retention (SIR) that requires the insured to bear the first dollars of loss (insurance is excess over the SIR).  The SIR may apply to defense costs as well as judgments or settlements.

In claims where the damages may exceed the policy limits, defense counsel should be on the lookout for “conflict clues” – signs that clients have unusual interests that must be protected. One of these signs is the existence of the excess exposure itself, as the insured may have uninsured assets at risk and have an unusually strong interest in the outcome. Another “conflict clue” is a request from one client to persuade another client of the merits of a particular course of action, such as when an insured requests that the defense lawyer pressure the carrier to accept a demand within the policy limits. Defense counsel should conspicuously inform the insured of the risk of a judgment in excess of policy limits and advise the insured of the right to retain independent coverage counsel.Of course, merely informing the insured of the right to retain independent counsel does not relieve the insurer of the duty to act in good faith.

Insurance Law: The Tripartite Relationship

The Tripartite Relationship

When a liability insurer retains defense counsel to represent an insured, the resulting relationship among the three parties is often called a “tripartite relationship.”  This relationship is unique in the insurance context. Georgia, like a majority of states, generally holds that the defense attorney has two clients: the insurance company and the insured. In most situations, the objectives of the insurer and the insured align and the tripartite relationship is beneficial to all parties.  Insurers have an interest in controlling the costs of litigation, which can be done through billing arrangements with appointed counsel.  In turn, defense attorneys receive regular business from their insurance company clients and are generally well compensated for their services.  Meanwhile, the insured is to be provided a defense from competent counsel with expertise in defending against claims brought against the insured.

Nonetheless, any time multiple parties are involved in such a relationship, ethical issues arise.  One court stated that the ethical dilemma created by the tripartite relationship would “tax Socrates, and no decision or authority … furnishes a completely satisfactory answer.” Lawyers appointed by the insurance company may be in-house attorneys, staff counsel, “captive” law firms, or panel counsel.  Regardless of the label, the attorney appointed by the insurance company to represent the insured typically has a business or employment relationship (often a long-standing one) with the insurer.  The laws of human nature attendant to this relationship are difficult to ignore.

Even the most optimistic view of human nature requires us to realize that an attorney employed by an insurance company will slant his efforts, perhaps unconsciously, in the interest of his real client – the one who is paying his fee and from whom he hopes to receive future business – the insurance company.

The close relationship between defense counsel and the insurance company is often a concern of both insureds and the courts. As made clear below, the best practice for avoiding conflict issues in the “tripartite relationship” is prediction of such conflicts and communication when they appear on the horizon.  Counsel could and should evaluate possible ethical issues at the inception of each representation.  As issues arise, the Georgia Rules of Professional Conduct and Formal Advisory Opinions issued by the Georgia Supreme Court address aspects of the tripartite relationship.  Where the Georgia Rules do not address the issues, attorneys should look to the Model Rules of Professional Conduct and the Formal and Informal Advisory Opinions of the American Bar Association (ABA).  With such guidance in mind, the following addresses some common concerns presented by the tripartite relationship.

Who is The Client?

An attorney owes a duty of loyalty to his or her client. This duty is expressed in the obligations to exercise independent professional judgment on behalf of the client, and to decline representation or withdraw if the ability to do so is adversely affected by the representation of another client. An attorney who does not know to whom his highest loyalty should be given – who his client is – is bound to drift into ethical trouble.

In a typical insurance case where coverage is not contested, a policyholder is involved in a potentially covered incident.  The insured tenders the claim to its insurer and requests a defense.  The insurer retains defense counsel to defend the insured.  However, in a case where the interests of the insured and the insurer diverge, to whom does the attorney’s duty of loyalty extend?  Courts take several different views of whether defense counsel represents the insurer, the insured, or both.  These views are called the “two-client”, “one-client”, and “third-party payor” (or “one-and-a-half client”) theories.

Two-client theory

A majority of courts hold that the lawyer has two clients: the insurance company and the insured. Courts that adopt this theory reason that both the insured and the insurer are beneficiaries of the insurance company’s exclusive control over the litigation. These courts also recognize that, in general, “companies and insureds usually enjoy a substantial commonality of interests, even when their interests do not perfectly align.”

In Georgia, whether a lawyer represents a party is a question of fact, not appearances, unless the party knowingly caused the attorney to appear as his agent in that matter. Georgia has not officially adopted the two-client rule in case law, although the Georgia Supreme Court’s Formal Advisory Opinion notes “the attorney for the insured is also the attorney for the insurer”. There may be some circumstances where defense counsel’s duty to the insured makes the insured the “primary” client.  The Opinion addresses the “ethical propriety of the plaintiff’s attorney in a personal injury case writing a letter to the insured defendant which may contain legal advice.” The Supreme Court stated that the appropriate attorney to provide advice regarding the insured’s legal rights is the insured’s attorney.  A potential conflict arises because both the insured and the insurer are the defense counsel’s clients. Interestingly, the Supreme Court appears to switch from a “two-client” theory to a “one-client” theory, stating: “the dilemma is only apparent. [Defense counsel] represents the insured as a client and has a duty to keep the insured fully informed by virtue of the rules of ethics…[Defense counsel] has a duty to inform the insured not only of any offer of settlement…but also of the potential tial liability of the insurer for a bad faith refusal to accept any reasonable offer within the policy limits.”

One-client theory

Although still the minority view, there is an increasing judicial trend toward holding that defense counsel’s only client is the insured.

In Atlanta International Ins. Co. v. Bell, the Michigan Supreme Court held that no attorney-client relationship existed between an insurance company and defense counsel.  Atlanta filed a malpractice suit against the attorneys that it retained to represent Atlanta’s insured in a premises liability case, claiming that the attorneys failed to raise a particular defense. Whether Atlanta had the standing to sue the attorneys depended upon the existence of an attorney-client relationship between the insurer and the attorneys it hired to represent the insured. Stating that “courts have consistently held that the defense attorney’s primary duty of loyalty lies with the insured, and not the insurer,” the court allowed the insurer to proceed pursuant to the doctrine of equitable subrogation. The court noted that

To hold that an attorney-client relationship exists between insurer and defense counsel would indeed work mischief, yet to hold that a mere commercial relationship exists would work obfuscation and injustice.  The gap is best bridge by resort to the doctrine of equitable subrogation to allow recovery by the insurer.  Equitable subrogation best vindicates the attorney-client relationship and the interests of the insured, properly imposing the social costs of malpractice where they belong.  Allowing the insurer to stand in the shoes of the insured under the doctrine of equitable subrogation best serves the public policy underlying the attorney-client relationship.

Third-party payor theory

The third-party payor or “one-and-a-half client” theory “advocates that ‘the lawyer be deemed to represent both the insurer and the insured until something goes wrong, at which point the insurer would no longer be a client, at least in the usual sense.” The theory considers that the insurer is often in the best position to manage and control the litigation, but relies on the attorney to protect its economic interests.  If the attorney can do so without compromising the loyalty the attorney owes to the insured, then the insurer also owes a duty of care to the insurer.  Since the insurer relies upon the attorney’s representation of the insured, the insurer is permitted to insure the attorney who acts negligently. It is important to note, though, that although this theory allows insurers control over the costs of litigation, the control is limited and insurers are not necessarily able to enjoy the full range of benefits or rights of control that they desire.

Insurance Law: Unfair Claims Practices Act

Unfair Claims Practices Act

Georgia’s Unfair Claims Settlement Practices Act is designed “to set forth standards for the investigation and disposition of claims arising under policies or certificates of insurance issued to residents of Georgia.” The UCSPA does not cover claims involving workers’ compensation, fidelity, or surety insurance. The Act sets out fourteen acts that constitute unfair claims settlement practices when committed.

 

 

The 14 Acts That Constitute Unfair Claims Settlement Practices

(1) flagrantly and in conscious disregard of the insurance laws of the State of Georgia

(2) with such frequency so as to indicate a general business practice to engage in such conduct. An insurer commits an unfair claims settlement practice by:

• Knowingly misrepresenting to claimants and insureds relevant facts or policy provisions relating to coverages at issue.
• Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies.

(3) Failing to adopt and implement procedures for the prompt investigation and settlement of claims arising under its policies.

(4) Not attempting in good faith to effectuate prompt, fair, and equitable settlement of claims submitted in which liability has become reasonably clear.

(5) Compelling insureds or beneficiaries to institute suits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits brought by them.

(6) Refusing to pay claims without conducting a reasonable investigation.

(7) When requested by the insured in writing, failing to affirm or deny coverage of claims within a reasonable time after having completed its investigation related to such claim or claims.

(8) When requested by the insured in writing, making claims payments to an insured or beneficiary without indicating the coverage under which each payment is being made.

(9) Unreasonably delaying the investigation or payment of claims by requiring both a formal proof of loss and subsequent verification that would result in duplication of information and verification appearing in the formal proof of loss form; provided, however, this paragraph shall not preclude an insurer from obtaining sworn statements if permitted under the policy.

(10) When requested by the insured in writing, failing in the case of claims denial or offers of compromise settlement to provide promptly a reasonable and accurate explanation of the basis for such actions. In the case of claims denials, such denials shall be in writing.

(11) Failing to provide forms necessary to file claims within 15 calendar days of a request with reasonable explanations regarding their use.

(12) Failing to adopt and implement reasonable standards to assure that the repairs of a repairer owned by the insurer are performed in a workmanlike manner.

(13) Indicating to a first-party claimant on a payment, draft check, or accompanying letter that said payment is final or a release of any claim unless the policy limit has been paid or there has been a compromise settlement agreed to by the first-party claimant and the insurer as to coverage and amount payable under the contract.

(14) Issuing checks or drafts in partial settlement of a loss or claim under a specific coverage which contain language which releases the insurer or its insured from its total liability.

There is no private right of action under the Georgia UCSPA. Rather, the Georgia Insurance Commissioner enforces the UCSPA. Despite the fact that an insured cannot raise a cause of action under the UCSPA, an insured may attempt to use evidence of a violation of the Act as evidence of an insurer’s bad faith.  Courts routinely admit evidence of a state’s unfair claim practices act and regulations in insurance bad faith actions.

Insurance Law: No Action Clause

No Action Clause

Many policies contain a provision limiting the amount of time in which an insured can bring suit against its insurer, effectively reducing the statute of limitations by way of contractual agreement. Such a contractual limitation or “no-action” clause provides that any suit against the insurer arising out of the policy must be brought within a specific time following “inception of the loss” or some other trigger. Such provisions are generally enforceable. The Supreme Court of Georgia has expressly rejected arguments that such clauses are “unfair,” ambiguous when, for example, they are read with other requirements allowing an insurer 60 days to decide on payment after submission of a proof of loss.

An insurer may waive the contractual limitation “where the insurer leads the insured by its actions to rely on its promise to pay, express or implied” or where conduct on the part of the insurer reasonably leads the insured to believe that strict compliance with the limitation provision would not be insisted upon. For example, where settlement negotiations lead the policyholder to believe that payment will be forthcoming without a lawsuit, the insurer cannot require the action to be brought within a certain time.  Also, if an insurer does not deny liability and takes actions indicating an intent to pay the claim without suit, an issue of fact is presented as to whether the insured was lulled into a belief that the limitation for filing suit was waived.  However, “mere negotiation for settlement, unsuccessfully accomplished, is not that type of conduct designed to lull the claimant into a false sense of security so as to constitute a waiver of the limitation defense.”Where suit has been delayed beyond the stipulated time on account of direct promises to pay the claim, the action is not barred by delay.  It is not necessary that there be an actual promise to pay in order for the acts of the insurer to effect a waiver of the time limitation if facts show that negotiations for a settlement have led the insured to believe that the insurer will pay the claim.  In most cases, whether a waiver occurred is a jury issue.

The Georgia Insurance Commissioner has adopted regulations requiring that no-action clauses in certain policies be no less than two years. The Supreme Court of Georgia has ruled that the regulation violated the Commissioner’s authority by contradicting O.C.G.A. § 33-32-1(a), providing for a no-action clause of no less than two years for fire insurance policies.

Insurer’s Duty To Provide Policy Information

O.C.G.A. § 33-3-28(a)(1) states that:

Every insurer providing liability or casualty insurance coverage in this state and which is or may be liable to pay all or a part of any claim shall provide, within 60 days of receiving a written request from the claimant, a statement, under oath, of a corporate officer or the insurer’s claims manager stating with regard to each known policy of insurance issued by it, including excess or umbrella insurance, the name of the insurer, the name of each insured, and the limits of coverage.  Such insurer may provide a copy of the declaration page of each such policy in lieu of providing such information.

In order to trigger the insurer’s duty, the claimant’s request must set forth under oath the specific nature of the claim asserted and must be mailed by certified mail or statutory overnight delivery.  The insurer must amend the information provided upon discovery of facts inconsistent with or in addition to the information provided.

Providing information as required by this Code section does not waive the insurer’s coverage defenses and is not admissible in evidence unless otherwise admissible under Georgia law. The statute is directive only; it does not create a cause of action and right of a claimant to seek damages if an insurer fails to comply with the statute.  However, an insurer’s failure to disclose limits can give rise to claims for misrepresentation, false swearing, fraud, and RICO violations, and courts have upheld damages for fraud where the insurer failed to disclose limits in response to a valid request.  An insurer may not charge the requesting claimant for the expense involved in complying with a request for information pursuant to O.C.G.A. § 33-3-28.

Insured’s Duty To Cooperate

Most policies contain a “cooperation clause” that requires an insured to cooperate with the insurer in the investigation and defense of a claim.  More specifically, the insured must cooperate in the insurer’s investigation, attend trial and make “full, fair, complete and truthful disclosures of the facts known to him relative to the [incident] when called upon to do so.”If an insurer’s investigation includes an examination under oath of the insured, and the insured completely fails to appear at the examination under oath, that failure could preclude recovery under the policy.

If the insured willfully and intentionally fails to cooperate, and this failure is prejudicial to the insurer in the defense or settlement of a claim, the insurer is relieved of the duty to defend or indemnify the insured for any judgment the insurer would be required to pay under the policy.

The insurer must show:

(a) that it reasonably requested its insured’s cooperation in defending against the plaintiff’s claim
(b) that its insured willfully and intentionally failed to cooperate
(c) that the insured’s failure to cooperate prejudiced the insurer’s defense of the claim…Once the insurer presents presents evidence that it was entitled to withdraw coverage, the burden shifts to the plaintiff to establish that the insured’s failure to cooperate was justified.

However, if the insured’s non-cooperation is merely technical or inconsequential, the insurer is generally not relieved of its duties. The insurer has the burden of proving that it diligently sought to obtain the insured’s cooperation and that the insured willfully and intentionally failed to cooperate.  If the insurer makes a showing of diligence and good faith, the burden shifts to the insured to show that his failure to cooperate was excused or justified.

If an insured voluntarily fails to attend trial after receiving a request to do so, the insured’s actions are generally considered per se prejudicial to the insurer. The insured’s total failure to cooperate may preclude recovery under the policy as a matter of law.  However, if the insured cooperates to some
degree or provides an explanation for non-compliance, the insured’s failure to cooperate becomes a jury issue.  The insured has a duty to keep up with his case and has a duty to reply to communications addressed to him by or on behalf of the company regarding his claim.  At the same time, the insurer has a duty to keep its insured informed once it has taken over the handling of the claim or lawsuit against its insured.

Finally, an insured violates the cooperation clause by collusively assisting maintenance of the claimant’s suit rather than assisting the insurer.

Insurance Law: Duty To Defend Multiple Insureds

 Duty To Defend Multiple Insureds

Where there are multiple insureds under a single policy, each insured is entitled to a separate defense. An insurer owes a duty of good faith and fair dealing to each insured. An additional insured, however, may have to elect coverage under the policy by notifying the insurer of his election and demanding a defense.

Reservation Of Rights

A reservation of rights  “is designed to allow an insurer to provide a defense to its insured while still preserving the option of litigating and ultimately denying coverage.” The seminal case on the issue is Richmond v. Georgia Farm Bureau Mut. Ins. Co. In that case, the insured’s minor son was driving his father’s car when he hit a pedestrian.  Immediately after the accident, the pedestrian was taken to the hospital and the insured volunteered to pay medical expenses.  Eight months after the accident, the insured received a letter from the pedestrian’s attorney indicating that suit would be filed.  The insured gave notice to his insurer, who sent the insured a non-waiver agreement.  The insured refused to sign the non-waiver, instead demanding an unqualified defense.  The insurer sent a letter to its insured unilaterally reserving its rights, retained counsel to defend its insured and sought declaratory relief as to coverage.  The Georgia Court of Appeals looked favorably upon the approach used by the insurer, approving of a “reservation of rights letter” that “fairly informs the insured of the insurer’s position.”

Waiver And Estoppel

The Georgia Supreme Court has ruled “where…an insurer assumes and conducts an initial defense without effectively notifying the insured that it is doing so with a reservation of rights, the insurer is deemed estopped from asserting the defense of noncoverage regardless of whether the insured can show prejudice.” This opinion impliedly overrules a long line of cases previously holding that the doctrines of waiver and estoppel are not available to bring within the coverage of a policy risks not covered by its terms, or risks expressly excluded.

An insurer that denies coverage and a defense for a specific reason waives the right to deny coverage for other reasons at a later time. In Hoover v. Maxum Indem. Co., a claimant was injured while working for his employer.  The claimant filed a lawsuit, and the insurer denied coverage and refused to defend.  In the letter denying coverage, the insurer relied on an Employers Liability Exclusion as the basis for the refusal to defend. The denial letter stated that it reserved the right to deny coverage for other reasons at a later date.  The claimant received a $16.4 million judgment, took an assignment from the insured and filed suit against the insurer.  The insurer defended based on the Employers Liability Exclusion as well as late notice.  The trial court granted summary judgment for the insurer on the late notice issue, and the Court of Appeals affirmed.  The Supreme Court of Georgia reversed, ruling that the insurer had denied all coverage defenses not set forth in the denial of coverage.

An insurer who defends under a proper reservation of rights may withdraw its defense if the investigation reveals non-coverage, but the insurer must do so seasonably and not delay its decision. If an insurer learns of information indicating that no coverage exists under the policy, the insurer is required to inform the insured immediately. In addition, an insurer who pays the excess of a property damage claim without a reservation of rights has not waived the defense of noncoverage where no action had been filed and the insurer had not undertaken the defense of the insured.  An insurer may also be estopped to deny coverage if the insurer undertakes the defense of the insured and is negligent in its handling of the defense.

Where an insurer seeks rescission of an insurance contract, a reservation of rights is not authorized to reserve its rights and file a declaratory judgment action.  In Minnesota Lawyers Mut. Ins. Co. v. Gordon, Minnesota Lawyers Mutual (“MLM”) issued a liability policy to an attorney who was sued after a property closing. MLM initially provided a defense to the insured but reserved its rights under the policies. MLM then filed a declaratory judgment and amended its complaint several times.  On the final amendment, MLM asserted that the insured’s policies should be void due to the insured’s alleged misrepresentations in applying for the policies. The Court of Appeals held that:

While a declaratory judgment is authorized when circumstances show a necessity for a determination of the dispute to guide and protect the plaintiff from uncertainty and insecurity with regard to the propriety of some future act or conduct, rescission is not characterized by uncertainty.  To the contrary, if a party to a contract seeks to avoid it on the ground of fraud or mistake, he must, upon discovery of the facts, at once announce his purpose and adhere to it.

Since MLM took a firm position as to its rights in requesting rescission of the policies, a declaratory judgment was inappropriate.

Insurance Law: Exhaustion Of Policy Limits

Duty To Defend And Exhaustion Of Policy Limits

Generally, an insurer does not have a continued duty to defend its insured after the insurer has exhausted policy limits by settling multiple claims with the insured’s consent, even though there might be additional claims arising from the same accident. In Liberty Mutual Ins. Co. v. Mead Corp., the Supreme Court of Georgia held that the insurer had no further duty to defend remaining claims after settling other claims and exhausting policy limits. The insurer had the insured’s consent to settle the claims, and the applicable insurance policy was construed to mean that “the duty to defend is limited by the amount of liability coverage afforded by the policy.”Similarly, if the insurer exhausts policy limits in good faith settlements of several claims, the insurer need not defend its insured on later-filed claims arising from the same accident. The rule is true even if the insurer mistakenly enters a defense on the later-filed claim, so long as the insurer did not prejudice the insured.

Based on a recent ruling by the Georgia Supreme Court, it remains to be seen whether this rule will hold true if the insurer commences to defend several claims arising out of a single accident without clearly reserving its rights to withdraw its defense at such time as policy limits are exhausted by payment to one or more of the claimants. “An insurer’s duty to defend its insured is not satisfied when the insurer settles by paying its policy limits to the wrong party.” The insurance policy in Atkinson v. Atkinson (like the one in Liberty Mutual Ins. Co. v. Mead), provided that the duty to defend would end upon payment of policy limits. The insurer entered a defense and paid policy limits, but to the wrong party. Because the payment did not resolve the case against the insured, the insurer could not withdraw.

These cases do not mean, however, that if an insured faces many lawsuits arising from a single accident, and it is clear that the liability will exceed policy limits, the insurer may tender the policy limits into court and withdraw from the defense of the lawsuits. The insurance policy at issue in Anderson v. U.S. Fid. & Guar. Co. (like most liability policies) provided that the insurer must defend as well as indemnify. The court ruled that allowing the insurer to tender policy limits into court addresses only the duty to indemnify and constituted a breach of the duty to defend while actions were pending. When an insurer is faced with a matter involving multiple claimants where the damages may exceed the policy limits, the insurer might take the following steps to reduce its potential bad faith exposure:

Steps To Reduce Its Potential Bad Faith Exposure When There Are Multiple Claimants

(1) reasonably and expediently investigate the matter and “attempt to ascertain the insured’s potential liability, identify the claimants, and assess the nature and extent of the claimants’ injuries or damages”

(2) “communicate with the insured concerning her potential liability as soon as possible” – inform the insured that the insurer will retain defense counsel and that the insured has the right to retain her own counsel and “diligently attempt to document all communications with its insured”

(3) “communicate with all claimants to inform them of [the insurer’s] policy limits – both per person and per occurrence – and its willingness to exhaust its limits to achieve a global resolution.” This may include convening a mediation or settlement conference. “The insurer should set a reasonable time limit for the claimants to accomplish their voluntary allocation. The insurer should also explain that if the claimants cannot reach agreement on the allocation of policy proceeds by the deadline, [the insurer] will either
(1) file an interpleader action
(2) begin settling individual claims as it deems reasonable.”

An insurer “should carefully document all communications with the various claimants and their counsel. If claimants or their lawyers misstate facts in communications, the insurer should attempt to correct their misimpressions.”

(4) “keep the insured apprised of the settlement process and its strategy.”

(5) if the claimants cannot reach a resolution amongst themselves, “the insurer should settle with individual claimants in a reasonable manner,” attempting to “prioritize the claims that pose the greatest threat of personal liability to the insured.”

Insurance Litigation: Duty To Defend

Duty To Defend

An important value provided by a liability policy is the insurer’s promise to retain attorneys to handle the defense of a lawsuit on behalf of an insured.  An insurer’s failure to defend sometimes accompanies the insurer’s failure to take advantage of a reasonable opportunity to settle within policy limits, making the failure to defend relevant to bad faith.  A typical commercial general liability policy includes the following:

We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages.  However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply.  We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result.

An insurer’s duty to defend turns on the language of the insurance contract and the allegations of the complaint asserted against the insured. The duty to defend is broad, and “it is only where the complaint sets forth true factual allegations showing no coverage that the suit is one for which liability insurance coverage is not afforded and for which the insurer need not provide a defense.” The insurer is obligated to defend where the allegations of the complaint against the insured are ambiguous or incomplete with respect to the issue of insurance coverage. The duty to defend is triggered if the complaint shows only “potential” or “arguable” coverage.

The insurer must liberally construe coverage and defend even if there is only a possibility of coverage. Any doubt as to liability and the insurer’s duty to defend should be resolved in favor of the insured. A carrier is relieved of the duty to defend only if it is clear that the plaintiff can prove no set of facts entitling him to relief. When a plaintiff alleges alternative theories of liability, there is a duty to defend even if a single alternative implicates coverage. The Georgia Court of Appeals has restated these rules as follows:

[A]n insurer is obligated to defend even where the allegations of the complaint against the insured are ambiguous or incomplete with respect to the issue of insurance coverage.  To excuse the duty to defend, the petition must unambiguously exclude coverage under the policy, and thus, the duty to defend exists if the claim potentially comes within the policy.  Where the claim is one of potential coverage, doubt as to liability and insurer’s duty to defend should be resolved in favor of the insured.

Landmark Am. Ins. Co. v. Khan

A recent example of the application of these rules is Landmark Am. Ins. Co. v. Khan. In that case, a claimant was shot while leaving a nightclub.  The claimant filed a premises liability lawsuit against the insured nightclub, alleging, inter alia, assault and battery by employees of the club.  The insurer denied coverage and refused to defend, relying on an assault and battery exclusion in the policy.  The exclusion had an exception stating that it did not apply if the assault and battery was committed by an employee of the insured while reasonably protecting persons or property. A default judgment in the amount of $2.3 million was entered against the insured. The claimant took an assignment and sued the insurer.  The insurer argued that the claim was excluded because

1. the insurer’s investigation had revealed that the person firing the gun did not fall into the category described by the exception to the exclusion
2. the claimant had not alleged that the assault and battery was committed while protecting persons or property.  Nonetheless, the court ruled that the insurer had breached the duty to defend as a matter of law because the allegations in the complaint did not unambiguously exclude the possibility that the facts could fit within the exception to the exclusion.The duty to defend is separate and distinct from the insurer’s duty to pay a judgment rendered against the insured.

The General Rule

The general rule is that, in making a determination of whether to provide a defense, an insurer is entitled to base its decision on the complaint and the policy.  The insurer is under no obligation to independently investigate the claims against its insured. A different rule applies, however, when the complaint on its face shows no coverage, and the insured notifies the insurer of factual contentions that would place the claim within coverage. In such a situation, the insurer has an obligation to give due consideration to its insured’s factual contentions and to base its decision on “true facts.” In order to base its decision on “true facts,” the insurer must necessarily conduct a reasonable investigation into the insured’s contentions. Requiring such an investigation does not place an unreasonable burden on insurers, especially in light of the availability of the “procedurally safe course” of providing a defense under a reservation of rights and filing a declaratory judgment action to determine its obligations. An insurer who fails to investigate its insured’s contentions and refuses a defense will be liable for a breach of the duty to defend if a reasonable investigation at the time would have established the potential for coverage.

Insurance Law: Duty To Give Notice And UM Coverage

What Is “UM” Coverage?

“UM” coverage is an optional coverage that an insured may purchase to cover the insured who is injured by the negligence of another person who has no liability coverage or insufficient liability coverage to compensate the insured for his or her injuries. Like any insurance policy, an automobile policy providing UM coverage will have its own provisions regarding notice of a claim to the insurer. Care must be taken in reading the policy to determine whether the General Conditions section of the policy contains a notice provision applicable to all coverages or whether the UM coverage section contains its own notice provision.

Manzi v. Cotton States Mut. Ins. Co.

Some general notice provisions that require notice to the insurer within a specified time period have been construed to begin to run following the date of the accident and not the date the insured learns that the tortfeasor may be uninsured or underinsured. In Manzi v. Cotton States Mut. Ins. Co., the insured was injured in an auto accident.  More than six months after the accident she learned that the tortfeasor who had injured her was underinsured, so she provided notice to her insurer that she would seek proceeds from her UM coverage.  The policy contained a general notice provision requiring that the insurer be “notified promptly, but in no event later than 60 days, of how when and where the accident or loss happened.” The policy did not specifically mention when the 60-day period began to run or what event triggered the notice requirement.  The Court of Appeals ruled that the provision was not ambiguously silent, as the surrounding policy language made it clear that the 60-day period began to run at the time of the accident.  The court concluded that the insured had breached the notice provision as a matter of law.  Because the provision further stated that it “shall be a condition precedent to the existence of any coverage,” the insured was unable to recover her UM benefits.  A different outcome results, and fact issues are raised with regard to timely notice, when the provision requires notice “as soon as practicable.”

In the event that the uninsured or underinsured driver is unknown, the insured “shall immediately” report the accident to law enforcement. The requirement is a condition precedent to recovery of UM benefits, and a delay of only “four or five days” following the accident bars UM coverage.

Insurance Law: Failure To Give Notice As Soon As Practicable

Whether reasonableness of late notice can be decided as a matter of law, or whether it should remain in the province of the jury depends on two factors:

• the sufficiency of the excuse
• insured’s diligence after any disability has been removed

OneBeacon Am. Ins. Co. v. Catholic Diocese of Savannah involved a delay in notice months after the insured was served with the lawsuit. The insured argued that the delay was justified because the claim triggered policies that were many years old and that could not be quickly located. The insured submitted an affidavit from its counsel attesting to the justification. The Eleventh Circuit affirmed a ruling that the delay was unreasonable as a matter of law. Although the court recognized that a 21-month is not always unreasonable as a matter of law, the affidavit was conclusory, bereft of critical dates and failed to raise a fact issue as how the delay was excused or justified.

Issue Of A Notice Being Considered As Timely

Where the insured has no knowledge of a claim, courts have generally found that the issue of whether notice is timely is for the jury. For example, in United Services Automobile Association v. Middleton, the defendant was involved in an accident with another car. At the time of the accident, there were no visible injuries, and the driver and passengers stated that they were not injured. The first notice of injuries came in a letter from the other driver’s attorney nine months after the loss, at which time the insured reported the loss. The court denied the insurer’s motion for summary judgment. Similarly, in Norfolk & Dedham Mut. Fire Ins. Co. v. Cumbaa, the Court of Appeals held that a jury issue existed as to whether a 19-month delay in providing notice was timely because substantial evidence of the claim did not come to the insured until that time.

 Failure To Give Notice As Soon As Practicable

Justification for failure to give notice as soon as practicable may not include the insured’s unfounded conclusion that there was no liability to the other party. It is the insurer’s job to reasonably investigate the issues of liability and damages. An insured is not required, however, to foresee every possible claim that could arise from an incident. In Newberry v. Cotton States Mut. Ins. Co., the insured attended a work-related social function and fought with another guest. The insured did not notify its insurer until 14 days after being served with a complaint. The insured testified that he believed any claims arising from the incident would be handled through worker’s compensation. The Court of Appeals held that an insured is not required to foresee every possible claim but is required only to act reasonably under the circumstances, creating an issue for the jury’s determination.

Forshee v. Employers Mut. Cas. Co.

Forshee v. Employers Mut. Cas. Co., the Court of Appeals explained:

Sometimes an event is so trivial or inconsequential that a court properly may conclude as a matter of law that no reasonable person would think that a claim could arise from the event and, therefore, that no notice of the event is required…it is the nature and circumstances of the accident or the incident and the immediate conclusions an ordinarily prudent and reasonable person would draw therefrom that determine whether an insured has reasonably justified his decision not to notify the insurer. Relevant circumstances include the nature of the event, the extent to which it would appear to a reasonable person in the circumstances of the insured that injuries or property damage resulted from the event, and the apparent severity of any such injuries or damages…A court also properly may consider whether anyone gave an indication that he intended to hold the insured responsible for the event and resulting injuries and the extent to which the insured acknowledged the likelihood that a claim could arise from the event, either by offering compensation to the injured person or asking him to sign a release…And a trial court must make every effort to eliminate the distorting effects of hindsight and to evaluate the conduct of the insured from the perspective of a reasonable person in the same circumstances as those in which the insured found himself.

Georgia Mutual Ins. Co. v. Criterion Ins. Co.

In cases where the policy requires notice “as soon as practicable,” an insured’s failure to give notice due to a lack of knowledge that coverage existed may be a jury question. In Georgia Mutual Ins. Co. v. Criterion Ins. Co., the insureds failed to give notice to the insurer for four months because they did not know their policy provided coverage for a new car. The Court of Appeals held that the issue of late notice was a jury issue.

State Farm Mut. Automobile Ins. Co. v. Sloan

In State Farm Mut. Automobile Ins. Co. v. Sloan, the insureds believed there would be no insurance coverage for an accident and did not give notice to their insurer for six months because their son was driving the car, the son was not named as an insured, and the son was driving a car not covered by the insurance policy. Again, the Court of Appeals held that whether the insureds notified their insurance company “as soon as practicable” was an issue to be determined by a jury.

Hill v. Safeco Insurance Company of America

In contrast, where a policy provides that notice be given “immediately,” failure to give notice may be subject to determination as a matter of law. In Hill v. Safeco Insurance Company of America, the Middle District of Georgia granted the insurer’s motion for summary judgment as to the insured’s failure to comply with the notice provision of his policy. The insured was required to give “immediate notice” to Safeco of the loss. The insured failed to give notice for six months because he did not believe his policy provided coverage for the loss.

If an insured fails to give notice of a complaint and summons as required by a policy and later provides notice of an amended complaint, each notice is subject to separate analysis. In other words, there is no “blanket rule” that if notice is untimely of an initial complaint, notice of an amended complaint is not necessarily untimely if it alleges new claims.

Insurance Litigation: Special Issues

Other Issues Involved In Insurance Litigation

All litigation regarding an insurer’s bad faith necessarily involves other issues associated with the law of insurance contracts and insurance coverage. For example, an insurer’s bad-faith failure to settle under the common law may have its genesis in the insurance company’s decision not to provide a defense to an insured, the lack of defense resulting in a large judgment in excess of policy limits. With respect to statutory bad faith, issues may arise as to whether the insurer’s decision not to pay a property damage claim is caused by the insurer’s failure to conduct an adequate investigation. Finally, any time there is litigation involving any type of insurance policy, certain issues – like timely notice – might come into play.

Duty To Give Notice And Liability Policies

An insured’s failure to provide notice of a claim or of a lawsuit to its liability carrier can defeat coverage. The standard commercial general liability policy provides that “[i]f a claim is made or suit is brought against any insured,” the insured must notify the insurer “as soon as practicable.” Other policies might provide for “immediate” notice upon knowledge of a suit or claim. The Georgia Legislature has decreed that automobile liability policies shall require notice of a suit as well as delivery to the insurer of a copy of the summons and process. As suggested below, and as made more clear by a reading of the cases, different language in an insurance policy’s notice provision can lead to different results. Accordingly, despite what courts before have decided, the insured’s duty of notice must be analyzed in relation to the specific policy language and the applicable facts.

The purpose of notice is to inform the insurer of potential liability so that it may promptly investigate the circumstances, prepare a defense, or consider the prudence of payment, settlement or other resolution. Under certain circumstances, therefore, delay may prejudice the insurer’s ability to control the defense of the case. If notice is a condition precedent to coverage under the policy, however, an insurer does not need to demonstrate that late notice caused prejudice in order to deny coverage. The lack of prejudice can, however, be a factor for consideration in determining whether notice is untimely under the circumstances. Also, “an insured is not required to foresee every possible claim, no matter how remote, that might arise from an event and give notice of it to his insurer. Instead, the law only requires an insured to act reasonably under the circumstances.”
Where an insured has not demonstrated justification for failure to give notice according to the terms of the policy, and where the insurer has not waived compliance, the insurer is not obligated to provide a defense and coverage is void. In most cases involving an automobile liability policy, on the other hand, Georgia law requires the insurer to prove that late notice caused prejudice.

Although most policies require notice from the actual insured, a third party, including an attorney for the injured party, can give notice to the insurer of the action in order to prevent the insurer from raising a late-notice defense. “It makes no difference who gives the notice, so long as a reasonable and timely notice is given the company and it has actual knowledge of the pendency of a claim or suit.” In Hathaway Dev. Co., Inc. v. Am. Empire Surplus Lines Ins. Co., the liability insurer received notice of the lawsuit from the claimant in accordance with O.C.G.A. § 33-7-15. Although the court noted that the statute applied only to automobile liability policies, the court nonetheless relied on older cases to rule that “[n]otice from [the claimant] was sufficient under [the insured’s] CGL policy to fulfill the contractual condition of notice.”

Notice to an insurance broker may not suffice as notice to the insurance company if the broker is an independent agent (or an agent of the insured) and the policy’s notice provision does not extend such apparent authority to the independent agent. Georgia courts generally construe the policy requirements that notice be “prompt” or “as soon as practicable” as requiring that notice be given in a reasonable time under the circumstances. An insured cannot always wait to provide notice until after the repercussions of an accident become fully known and fully appreciated. Instead, it is the nature and the circumstances of “the incident and the immediate conclusions an ordinarily prudent and reasonable person would draw there from that determine whether an insured has reasonably justified his decision not to notify the insurer.” Whether

an insured gives notice under a policy “promptly” or “as soon as practicable” is generally a question of fact for the jury and not an issue for summary judgment. If the undisputed facts and circumstances indicate that an insured’s delay in giving notice was unjustified and unreasonable, the court may rule on the question as a matter of law.”

Examples Where Notice Was Late

Under the facts and circumstances of the following cases, notice was late as a matter of law:

• 8 months – Southeastern Exp. Systems, Inc.v. Southern Guaranty Ins. Co. of Georgia
• 13 months – Briggs & Stratton Corp. v. Royal Globe Ins. Co.,
• 22 months – Aegis Security Ins. Co. v. Hiers, 211 Ga.App.
• 38 months – Brazil v. Government Employees Ins. Co.
• 52 months – International Indem. Co. v. Smith
• 70 months – Townsend v. Nat’l Union Fire Co.
• 5 years – South Carolina Ins. Co. v. Moody
• 25 years – Plantation Pipeline Co. v. Royal Indem. Co.

However, lapse of time alone is not sufficient to establish non-compliance with the notice provision. “In most cases, however, the reasonableness of a failure to give notice is a question for the finder of fact.”